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New regulated market for crypto-businesses is now open

Surprisingly, but in this article, we will not tell you about the United Kingdom, which most of readers can think about.

At the end of February 2019, the Kingdom of Bahrain, an island country in the Persian Gulf, joined a number of the relatively small jurisdictions with great ambitions in crypto-industry. Here we can talk about authorization rules for cryptocurrency exchanges and wallets, which became effective in Estonia in November 2017. As well as about Distributed Ledger Technology framework entered into force in Gibraltar, the United Kingdom overseas territory, in January 2018. For sure, it is worth to recall a great set of cryptocurrency laws adopted later in 2018 in Malta.

Recently on February 25, 2019, the Central Bank of Bahrain (“CBB”) hasintroduced the final rules on a range of activities involving crypto-assets. And compared to the above-mentioned regulatory frameworks in other countries, these Rules appear quite complex (sure, containing almost 200 pages).

So, who needs to be licensed under these new licensing conditions?

In general, the Rules cover crypto-asset activity of trading, dealing, advisory, portfolio management, custodian and crypto-asset exchange services. From now, no person may engage in business activity providing the regulated services within or from the Kingdom without obtaining a license from the CBB.

The “business” here means not only provision of the regulated services for commercial gain, but even positioning themselves as those who can provide the regulated services.

Further, the activity will be deemed to be undertaken “within or from the Kingdom of Bahrain”, in case of a person is either incorporated in Bahrain; uses an address situated in Bahrain for its correspondence; or directly solicits clients within Bahrain.

Categories of a license

The Rules provide with 4 types of licensing in accordance with the needs and objectives of a particular business model. Thus, depending on the range of the regulated services to be provided, an applicant may seek Category 1, 2, 3 or 4 licenses.

It is necessary to understand the scope of activities the applicant is allowed to perform in Bahrain under a specific license type. For example, while holding a Category 1 license, you may accept and transmit clients’ buy/sell orders for execution to a third-party; as well as provide investment advice in relation to crypto-assets. However, you may not execute orders itself or hold any clients’ assets or money.

Application

As a common practice, a set of documents describing internal policies, procedures and internal controls should be filled along with a comprehensive business plan in order to apply for a license. But what is notable is that application fee constitutes just 100 BD (approximately 265 USD at the moment of writing). Further annual renewal fee constitutes 0.25% of relevant operating expenses, subject to a minimum of 2000 BD (~5300 USD) and a maximum of 6000 BD (~15900 USD).

Licensing process is set to receive a final decision from the CBB within 60 calendar days once the application is complete and all required information and documents have been provided.

Comparing, for instance, to Gibraltar, application fee in Bahrain is almost 40 times lower than the lowest threshold in the UK overseas territory. However, renewal fee will be just 2,5 times lower, that is commensurable to Gibraltar’s conditions (actually, a good point for a regulator to lower application fee to attract more applicants). Finally, timing in Gibraltar takes at least three months, so licensing in Bahrain looks quite attractive, making up relatively quick and cheap process. But of course, it is important to consider your target market when making a decision on the jurisdiction.

Requirements

The Rules establish clear requirements for an applicant to obtain and hold a license. Among them are requirements for minimum capital, corporate governance, assets safeguarding, cybersecurity, risk management, complaints handling, anti-money laundering, etc. All named functions have to be well formalized and documented.

It is important to understand a distinction between locally established companies and branches of foreign entities in terms of requirements.

Overseas crypto-asset companies must maintain a local management presence and premises in the Kingdom appropriate to the nature and scale of their activities. Moreover, overseas crypto-asset applicants must seek the CBB’s prior approval if some of its controlled functions are resident outside of Bahrain.

Also, in the case of branch applicants or applicants that are a part of a group, a letter of non-objection to the proposed license application from the applicant’s home supervisor and confirmation of good-standing and regulatory compliance must be filled with the CBB.

Having analyzed the requirements, we come to conclusion that Bahrain’s approach has much in common with Belarus (and its Decree No. 8), rather than with Gibraltar’s licensing. Framework in Gibraltar offers principle-based approach, determining the final goal and leaving the ways of achieving it for consideration of an applicant. While Belarus (as well as Bahrain) directly establishes strict requirements for applicants’ documents and business processes.

Jurisdiction’s Anti-Money Laundering Rate

Bahrain is a leading financial centre in the Gulf region, having a primarily service-based economy, with the financial sector providing roughly 18 percent of the gross domestic product.

The Kingdom is not included to the well-known Financial Action Task Force’s list of countries that have been identified as having strategic AML deficiencies (known as “FATF black list”) or EU list of high-risk third countries, which becomes more and more important among the EU financial institutions in their risk assessment practices. There are no international sanctions currently in force against this country. Nevertheless, the high risks area is offshore territory status of the country, which can have adverse impact on international payments.

Conclusion

We expect that the number of regional businesses will move their operations and offices to Bahrain, but whether the largest players on the market will make any movements toward the new opportunities offered by the Kingdom – still under question.

Definitely, Bahrain has proposed completely different approach from what we used to in the era of a risk-based approach (you can simply check the clause 4.4.5 of the Rules to get what we mean). Nevertheless, it may work for a nascent businesses and technologies, which require the well-defined rules and certainty.

It should be noted that the region has already made some efforts to regulate the field. For instance, the United Arab Emirates Securities and Commodities Authority is currently working on regulations for Initial Coin Offering. Besides, in 2018, the Financial Services Regulatory Authority of Abu Dhabi issued the Guidance on the regulation of crypto asset activities, which provides the framework for operating crypto asset businesses in or from the Abu Dhabi. But after introducing their new Rules, Bahrain has a chance to become an entry point to the Middle East cryptocurrency market.

Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, financial, or other advice.

Serhii Mokhniev, CAMS

Kristina Nikipolska

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Serhii

European Union

6 years in AML

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